The Era of Restructuring Returns Again

Our economy is in danger once again. It has been about a decade since the 1997 foreign exchange crisis and the 2008 global financial crisis. This virus outbreak originating in China is paralyzing the economy all at once. Both demand and supply have been hit by shocks. Considerable damage is unavoidable. If handled properly, it may end at the level of the previous two crises, but if mishandled, it could lead to economic collapse followed by prolonged stagnation. An appropriate response is needed. To that end, a correct diagnosis must come first.

Businesses are groaning under a cliff-like drop in sales. They are keeping quiet ahead of the April general election, but once the political event is over, a wave of corporate bankruptcies and mass unemployment is expected. It is difficult to predict how painful the restructuring will be. What is clear is that everyone will face a situation unlike anything experienced in the past.

Individuals are also expected to face hardship. Just as each person is being tested for their health before the tribunal of the COVID-19 virus, each individual must endure the process of the economic crisis. Some will suffer from reduced income, and cases of job loss will increase. Some will go through the misfortune of having to sell their homes or go bankrupt because of the economic crisis.

The government is pouring massive amounts of money into the market in response to the credit crunch. In the early stages of an economic crisis, it is necessary to respond quickly to financial paralysis. But quantitative easing is not the solution that heals the problem. In the long run, expansionary monetary policy can only cause price instability.

Politicians are calling for massive fiscal spending in the name of reviving the economy. But the economy does not recover simply because the government hands out vouchers. Without competitiveness across sectors to support it, economic recovery will be difficult. Rather, there is a strong concern that government subsidies will only increase debt and prolong the burden on the private sector.

Businesses have already been losing vitality due to tax increases, excessive hikes in the minimum wage, and the forced implementation of the 52-hour workweek. Companies with weakened fundamentals are now suffering pressure to exit because of this crisis. Business operators driven to the brink of exit cannot avoid restructuring. Rather than belatedly injecting funds after insolvent firms emerge, the government should have removed in advance the regulations that hold back corporate competitiveness. Even now, the government must increase institutional flexibility so that businesses can regain competitiveness. The time has come for a full-scale review of pro-labor union policies and income-led growth policies.

The Kim Dae-jung administration responded to the foreign exchange crisis with flexibility by increasing labor market flexibility and removing various regulations. Thanks to that, a rapid economic recovery became possible. The Moon Jae-in administration must also boldly increase labor market flexibility and ease regulations so that businesses can regain vitality.

The moment this crisis is overcome will be the moment when each economic actor regains competitiveness. To secure profitability again, businesses must use restructuring to shed their troubled parts and show that they can adapt to the changed environment. We must not forget that Japan’s lost 20 years was a disaster brought about by compassionate policies that failed to clear away insolvency.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 또 다시 돌아온 구조조정의 시대

Author: Sung-no Choi

Date: 2020-03-30

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=22&idx=22524